10-Year T-Note Sep '21 (ZNU21)

Description

US interest rates can be characterized in two main ways: credit quality and maturity. Credit quality refers to the level of risk associated with a particular borrower. US Treasury securities, for example, carry the lowest risk. Maturity refers to the date on which a security matures and must be repaid. Treasury securities carry a full spectrum of maturities, from short-term cash management bills to T-bills (4-weeks, 3-months, 6-months), T-notes (2-year, 3-year, 5-year, 7-year, and 10-year), and 30-year T-bonds. The most active futures markets are the 10-year T-note, 30-year T-bond, and Eurodollar futures, all traded at the CME Group.

Prices - CME 10-year T-note futures (Barchart.com symbol ZN) were under pressure in early 2025, falling to a 2-year low in January, and the 10-year T-note yield climbed to a 2-year high of 4.81%. Signs of US labor market strength dampened the outlook for interest rate cuts and pushed T-note yields higher after nonfarm payrolls in December rose by 237,000, the most in 2-1/2 years. Also, inflation pressures undercut T-note prices after the January CPI ex-food and energy unexpectedly accelerated to +3.3% yr/yr, well above the Fed's 2.0% target.

However, T-note prices ratcheted higher into early April, posting their 2025 high, and the 10-year T-note yield dropped to a 1-1/4-year low of 3.86%. Global trade tensions fueled concerns about slowing global growth and boosted T-note prices after the US imposed tariffs on Canada, China, and Mexico in March. T-notes also found support after China retaliated to US tariffs with 34% tariffs on US goods, sparking concerns that a global trade war could drive the US and global economies into a recession.

T-note prices tumbled into May, and T-note yields jumped by +76 bp from their April low to 4.62% amid concerns about soaring US deficits. There was concern that the unfunded tax cuts in President Trump's budget could force the Treasury to increase the sales of Treasury debt securities to finance the burgeoning deficit. Also, there was concern that US tariffs could push the economy into stagflation and keep the Fed from cutting interest rates. US trade policies caused a crisis of confidence in the dollar, prompting foreign investors to dump dollar assets, including Treasuries. In addition, hawkish Fed comments weighed on T-note prices after Fed Chair Powell said the Fed was in no hurry to adjust monetary policy and Fed Governor Kugler said she was more concerned about the inflationary implications of recent tariffs than about economic growth.

Signs of a slowdown in the US economy helped T-note prices recover into August after the July ISM manufacturing index unexpectedly contracted by the most in 9 months. Also, July nonfarm payrolls rose less than expected, and June payrolls were revised sharply lower. The economic weakness prompted the Fed to cut interest rates by -25 bp in September, keeping T-note prices firm. The FOMC kept easing monetary policy for the remainder of the year, cutting the federal funds rate by -25 bp at the October and December FOMC meetings.

Despite the Fed easing policy, T-note prices traded sideways into year-end on concerns over the Fed's independence amid threats from President Trump to fire Fed Chair Powell. The 10-year T-note yield finished 2025 down by -40 bp at 4.17%.

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